Fulfilment By Amazon…Hmmm… There’s a new term right there. If you have never sold on Amazon or conducted any form of selling physical products on the internet then you most likely never heard the term “Fulfilment By Amazon”. Basically, what this means is that instead of you having to ship your product to customers Amazon will handle all that for you. The packing, shipping, delivery and handling all customer queries and complaints.
FBA sellers have an edge on Fulfilled by Merchant (FBM) sellers for a few reasons. For starters, sellers who use FBA stand out from their competitors with faster delivery and have access to a much wider customer base.
However, you have got to consider both sides of the coin and what are the advantages and disadvantages of selling via FBA.
Pro #1: Access To Prime Subscribers
As a retailer you really couldn’t ask for a better customer. Prime subscribers pay $99 per year in order to take advantage of free 2-day shipping.
Prime subscribers are not only loyal, but they tend to purchase more expensive items and buy 150% more than non-Prime customers. To be more specific, they spend around $1,340 on Amazon annually, whereas non-Prime customers clock in at $529.
Selling with FBA gives you access to a much wider customer base — while specific numbers haven’t been released by Amazon, there has been speculation that there are upwards of 50 million Prime subscribers. That’s a lot of dough to be made.
Pro #2: Amazon Takes Care of Shipping, Returns, and Customer Service
When a sale is made, Amazon picks it, packs it, and ships it to your customer. Quick shipping makes for happy customers, and happy customers make for more sales for you.
Oh, and if your customer isn’t satisfied with his or her service, Amazon will handle that too. This saves you time and money, because there will be no need to employ additional customer service reps.
Finally, because your items are being stored in Amazon’s fulfillment centers, you won’t have to worry about needing all of that space for your ever expanding inventory.
Pro #3: FBA is a Tiebreaker in the Buy Box
Ahh, the ever elusive Buy Box. The formula to consistently winning it is one of those trade secrets like the formula for the Gobstopper in Charlie and the Chocolate Factory (no one must ever know, for fear it will end up in the hands of Slugworth).
What we do know is this: depending on the product category, you can price up to 2-10% higher than competitors and still win the Buy Box if you are using FBA and competitors aren’t.
Yes, you heard that right. This is because shipping is factored into the total cost, so if your item is priced at $20 with Prime free shipping, it still beats out a merchant-fulfilled item at $15 + $5 shipping.
Pro #4: Higher Volume of Sales
While this isn’t a guarantee, we—along with our clients— have found that just by switching over, you’ll see a lift in unit sales volume, to the tune of 20% or more. Many sellers have reported higher, including double their original volume. Much of this is due to your access to Prime subscribers.
Pro #5: Customers are willing to Pay More for the Same Product
The vast millions of Prime subscribers know a good deal when they see it. As we mentioned earlier, you can factor the cost of shipping into the price. Prime customers are willing to sacrifice a few bucks in order to ensure prompt 2-day delivery and a little added convenience.
Con #1: Harder to Keep Track of Inventory
As you begin to store more and more of your items in Amazon’s fulfillment centers, it becomes harder to keep track of your inventory. It’s not as if you can physically see what you have in stock – it becomes an overwhelming task to continue checking as your business expands.
This is where it becomes necessary to employ some type of inventory management system. One of the most commonly overlooked problems for Amazon sellers is stale inventory.
Stale inventory is like having the most beautiful house with termites slowly eating away at the frame. If you don’t tend to it and fix the problem, sooner or later everything will come tumbling down. In this case, those pesky termites are the storage fees are eating away at your profits and cash flow tied up in stale inventory. This can be extremely hard to pinpoint if you do not have an effective strategy in place.
Finally, we talk to many FBA sellers that find it hard to keep their best sellers in stock. Keeping these items in stock is absolutely crucial to the success of your business.
The Pareto Principle states that 20% of the inputs produce 80% of the outputs. You must make it your top priority to keep that 20% in stock or you could lose up to thousands of dollars per year in profits. And conversely, you need to constantly liquidate and clear out stale inventory so you’re able to pay your suppliers and yourself to continue growing.
Con #2: Not Every Product is Profitable to Sell with FBA
Of course, by taking advantage of Amazon’s fulfillment centers you will be incurring certain fees. It’s up to you to decide which items are profitable to put into FBA and which you should continue to fulfill yourself.
Products for which you have a low volume and low margins will not be profitable sell with FBA. In addition, any heavy and inexpensive low margin items that require higher storage fees will ensure a harsh blow to your profits.
Con #3: Must Have the Capital to Invest Up Front
Unlike drop shipping, where you can offer unlimited inventory without upfront capital, FBA is more akin to investing in the stock market, where you choose which stocks (products) and how many shares (units) to order, depending on your investment strategy and capital.
However, if you do have the upfront capital to invest you are in a great position, since this is a barrier to entry for many competitors.
Con #4: Amazon Will Not Ship Certain Items
Certain items deemed hazardous are strictly prohibited and will not be shipped by Amazon’s fulfillment centers. This includes any flammable liquids, flammable solids, and aerosols. Unfortunately, some beauty products fall under this category.
No one knows your business better than you do, and ultimately the decision to do FBA is yours to make. If you think FBA is right for your business, the fees shouldn’t be viewed as an additional cost. Selling with FBA is a competitive advantage, and one that is often recouped in pricing strategy and higher sales volume.
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